The tax laws are constructed so that a nonresident investor and a resident investor will be treated the same. If you’ve handled your tax returns properly over the years, you — as a nonresident of the U.S. — will be pay tax in the same way you would have, had you been a U.S. resident.

Concept: capital gain

Your tax is figured on what is called “capital gain.” Normal people would call it the profit on sale. Tax laws create confusion amongst the laity by renaming common concepts with cryptic jargon.

Here’s the equation for calculating capital gain:

Selling price — expenses of sale — “adjusted basis” (explained below) = capital gain.

Concept: what you paid for the property = “basis”

What you paid for the property originally is called “basis.”

Example

If you bought a piece of land for $100,000, your basis is $100,000.

Basis can go up. If you invest more money into the property for capital improvements, you increase basis.

Example

You bought a piece of land for $100,000. You spent another $300,000 to build a house on the land. Your basis is now $400,000.

Basis can go down. This is usually for depreciation.

Example

You bought a piece of land for $100,000. You spent another $400,000 to build a house on the land. Your basis is $400,000. Every year you take a depreciation deduction of $10,000. At the end of the first year, your basis is $390,000.

OK. Clear on that? This basis number, as moved up and down for your activities during ownership, is called “adjusted basis.”

Tax rate applied to capital gain

Once you’ve calculated your capital gain, you are in a position to calculate your tax liability.

If you own the real estate for more than one year, the Federal tax is 15 percent of the capital gain. (If you own the real estate for less than one year, the profit is taxed as ordinary income at Federal tax rates that approach 40 percent). I’m talking now of ownership structures that DON’T involve corporations. Those rules are different.

States (and sometimes cities) will impose a tax on the capital gain. The rates vary. California’s rate will top out at 9.3 percent. (Again, we’re talking about situations where we don’t have corporate ownership of the U.S. real estate).

Tax is unavoidable

There is not much that you can do to eliminate the tax on your profit when you sell. U.S. tax laws do not discriminate against nonresident investors in calculating the tax liability.

There is sometimes a thought that the sale can be made in the U.S. and cash repatriated to the investor’s home country. How will the U.S. ever collect its tax from you if you (and your money) are never coming back to the U.S.?

Well, the U.S. tax authorities thought of that. The answer they have: mandatory withholding of 10 percent of the gross sale price of the real estate. The implications and dynamics of tax withholding will be the subject of another topic in this series.